Crimea: The Legal Risks of Global Sanctions

    View Authors 6 March 2014

    President Barack Obama signed an Executive Order (E.O.) on March 6, 2014, to authorize targeted sanctions against certain Russian entities over their involvement in the Crimean Peninsula – territory the United States recognizes as belonging to Ukraine. In response, the upper chamber of the Russian Parliament is preparing a bill that would allow the Russian government to confiscate the property of certain U.S. and European companies.

    The impact of this crisis has already rippled through global financial markets. Since Monday, the Russian ruble has fallen by 10 percent and only partially rebounded. Earlier in the week, the United States canceled negotiations on the U.S.-Russia Bilateral Investment Treaty, and the U.S. Department of Defense suspended the military-to-military relationship, including canceling pending Russian military contracts. Russia’s continued membership of the G-8 is also in doubt.

    The E.O. seeks to isolate Russia in response to its activities in Crimea, while still leaving “all options on the table” in case of further escalation, including stricter economic and political sanctions.

    EXECUTIVE ORDER

    Section 1 of the E.O. authorizes the imposition of sanctions against persons that the U.S. Treasury and State Departments determine have participated in, or are owned or controlled by persons that have participated in, any of the following activities:

    • Being responsible for or complicit in actions or policies that: undermine democratic processes or institutions in Ukraine; threaten the peace, security, stability, sovereignty, or territorial integrity of Ukraine; or misappropriate assets of Ukraine or an economically significant entity in Ukraine;
    • Asserting governmental authority over any part or region of Ukraine without authorization of the Government of Ukraine;
    • Leading an entity that has, or whose members have, engaged in any of the above-listed activities or an entity that has had its property blocked pursuant to this order; and/or
    • Materially assisting, sponsoring, or providing financial support for, or goods or service to or in support of, any of the above-listed activities or an entity that has had its property blocked pursuant to this order.

    Any person or entity meeting these criteria may be listed as a Specially Designated National (SDN) by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). The effect of being designated as an SDN is threefold. First, all property of a listed SDN that comes within the possession or control of a United States Person is “blocked.” Second (and following from the first), an SDN is effectively cut off from the U.S. financial system. Thus, SDNs are generally unable to effect international payment denominated in U.S. dollars. Third, no United States Person can engage in any transaction or dealing with a listed SDN. Of note, until persons are designated pursuant to this E.O., no sanctions are actually imposed.

    Section 2 of the E.O. also authorizes the U.S. government to deny visas for immigrant and non-immigrant travel for non-U.S. persons found to meet the criteria set forth in Section 1.

    Designations under the E.O. can be made immediately. Separately, the U.S. Department of Treasury and other agencies will promulgate implementing regulations – a process that can be lengthy.

    POTENTIAL EXECUTIVE AND CONGRESSIONAL NEXT STEPS

    The targeted nature of the E.O. reflects the Obama administration’s efforts to coordinate with the European Union (EU). The EU does not favor deep economic sanctions against Russia’s financial institutions and economic entities, largely because the EU is reliant upon Russian energy. Moreover, the administration may have acted unilaterally to reduce the likelihood of congressional action, which preserves its own discretionary authority. It has also reserved the right to enact more sanctions if the crisis in Crimea is not resolved.

    Nevertheless, a number of U.S. congressmen continue to call for stricter sanctions, and legislation could be introduced next week. Beyond the E.O. provisions, Congress could target Russian financial institutions, Russian companies with a U.S. presence, and Russian companies and state-owned enterprises that conduct business with U.S. entities – with the ultimate goal of financially isolating Russia. Given the central role of the United States in the international financial system, banking sanctions have been a powerful tool for U.S. regulators. Congress may introduce stronger sanctions, such as:

    • Prohibiting access to U.S. government financing, such as the Export-Import bank;
    • Restricting access to U.S. correspondent and payable-through accounts; and
    • Applying increased scrutiny to Russian financial institutions, their accounts, and their transactions.

    As of March 6, four non-binding congressional resolutions have been introduced that encourage Congress to enact legislation containing these types of broader sanctions, including targeting Russia’s banks and petrochemical sector to change Russia’s calculus in Crimea by exacting an economic cost. The content and fate of any legislation will be based on a number of political factors. The Republican Party is particularly unified in its support for a package of “mandatory” sanctions against Russia. Senior Senate Democrats, including Senate Majority Leader Harry Reid (D-Nevada), support “permissive” sanctions that would give the President enforcement discretion.

    Given the popularity of sanctions legislation in Congress generally, the increasing tension in U.S.-Russian bilateral relations, and the fact that 2014 is an election year, we expect that any Russia sanctions legislation introduced in Congress would have a strong chance of passage, unless the administration issues a veto threat or otherwise successfully pressures Democrats not to vote for the legislation.

    For more information regarding the potential implications of sanctions targeting Russia, please contact Stephen McHale (smchale@pattonboggs.com) or Daniel Waltz (dwaltz@pattonboggs.com).